Educated Yet Broke
posted by Rafael Pardo
Can you be too poor to file for bankruptcy, yet have the ability to repay your student loans?
When Congress amended the Bankruptcy Code in 2005, it also amended the Judicial Code to provide for the waiver of the mandatory filing fee for bankruptcy. That’s right. Prior to this statutory amendment, if you were so financially strapped that you couldn’t pay the filing fee (then, $150 for Chapters 7 and 13; now, $220 for Chapter 7 and $150 for Chapter 13), you were out of luck: Per the Supreme Court’s 1973 decision in United States v. Kras, 409 U.S. 434, in forma pauperis relief was unavailable in bankruptcy. Lest we prematurely praise Congress for changing this state of affairs, debtors today will get a waiver of the filing fee only under very narrow circumstances. A debtor must have (1) household income less than 150% of the poverty line and (2) and an inability to pay the filing fee in installments (see 28 U.S.C. § 1930(f)(1)).
Now that we have a sense of what Congress deems to be a financially dire situation, at least for purposes of filing for bankruptcy, it strikes me that we might use this measure to gauge a debtor’s inability to repay other types of debts—say, for example, student loans. In an empirical study of the discharge of student loans in bankruptcy, Michelle Lacey (mathematics, Tulane) and I documented that the financial characteristics of the great majority of debtors in our sample evidenced an inability to repay their student loans. One measure we used was the amount of the debtor’s household income in relation to the poverty line established by the U.S. Department of Health and Human Services. We had sufficient information to calculate this figure for 262 discharge determinations. For this group of debtors, half of them had household income less than 200% of the poverty line. It didn’t occur to us to run the numbers using the 150% figure applicable to the fee waiver. In light of the new statutory provision, I’ve set out to look at our data from this perspective. The numbers are sobering, to say the least.
Approximately 35% of the 262 debtors had (1) household income less than 150% of the poverty line and (2) less than $201.93 (in 2003 dollars) in monthly disposable household income—that is, the equivalent of the $220 Chapter 7 filing fee in 2006. Based on these figures, slightly more than a third of the student loan debtors would have been on their way to qualifying for a waiver of the bankruptcy filing fee had they filed for Chapter 7 today. Within this subgroup, however, approximately 42% of the debtors were denied a discharge of their student loans—which, on average, would have taken 2 years and 9 months to repay if the debtor lived expense-free and devoted all household income to this endeavor. It seems horribly unrealistic to expect that such a debtor would have the ability to repay his or her student loan. While the Bankruptcy Code fails to define “undue hardship,” the standard for discharging student loans in bankruptcy, perhaps courts should begin to look at the new fee-waiver provision to inform their application of the standard and to avoid troubling results such as these.